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Financial Industry Insights from Advisors Asset Management

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CPI a Relief at 7%?


At Insight, we never expected to respond with a sigh of relief to the Consumer Price Index (CPI) reaching 7%, the highest since 1982. Core inflation once again set a new post-1991 high of 5.5%.

This CPI report showed continued impact from supply chain woes within the “flexible” categories and sustained, but not accelerating, inflation from “sticky” categories. As such, we expect inflation to moderate this year, while remaining significantly above the Federal Reserve’s (Fed) target.

Energy prices actually fell

Having been a large driver of inflation over the last two, energy prices fell 0.4%. This reflects the fact that oil prices initially fell in December due to concerns about the rapid global spread of the omicron variant over the holiday season. Nonetheless, crude oil prices have since rebounded, meaning another upswing in the energy component of CPI cannot be ruled out.

Supply chains still a factor

Although we expect supply chain issues to dissipate, for now they will likely continue to have an impact on CPI. New car prices were up 1.5% and used cars up 3.5%, contributing about 0.15 percentage points to headline CPI. Appliance and furniture prices also rose significantly.

Sticky inflation categories slowed slightly

We stress that although the categories mentioned above are important, they are considered to be the flexible elements of the inflation index.

As such, for real clues on the future trajectory of CPI, we are watching sticky categories more closely, such as the shelter and healthcare components.

Notably, shelter inflation (which is weighted at 30% of the CPI index) came in at 0.4%. This is a high level, but importantly did not accelerate on a month-on-month basis. Encouragingly, real-time data shows a slowing in monthly rental rate increases, which in our view can help to cap shelter inflation at 5%.

Nonetheless, as base effects in the flexible categories potentially fade over the coming months, we expect shelter to emerge as the main category driving more moderate year-on-year inflation prints this year.

The other main sticky category, medical services, rose 0.3%, led by insurance which was up 1.6%. We expect insurance inflation to reach highs of approximately 20% annually. However, we expect the impact to be less notable than the shelter component since it is only weighted at roughly 1% of the CPI index.

Fiscal and monetary tightening a headwind for CPI

Since the last Fed meeting, the Federal Open Market Committee (FOMC) has been guiding the market to expect the Fed to begin reducing the size of its balance sheet, not merely for it to end quantitative easing or enact multiple rate hikes.

Fiscal retrenchment may also be in the cards, to the tune of $1.7 trillion relative to 2021’s stimulus. The January 12 report was the last before the expiration of the larger monthly child tax credit payment, initially enacted in 2021 as a response to the pandemic.

The contraction of this stimulus is likely another headwind for CPI over the coming months. We expect inflation will slow significantly during the second half of the year, although it is highly likely to remain closer to 3% than 2%.

CRN: 2022-0119-9719 R

The Consumer Price Index (CPI) is released by the Bureau of Labor Statistics as a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.

Please note: any forecasts or opinions expressed herein are Insight Investment's own as of January 12, 2022 and are subject to change without notice. This information may contain, include or is based upon forward-looking statements. Past performance is not indicative of future results.

The opinions and views of this commentary are that of Insight Investment and are not necessarily that of Advisors Asset Management.


This commentary is for informational purposes only. All investments are subject to risk and past performance is no guarantee of future results. Please see the Disclosures webpage for additional risk information at commentary-disclosures. For additional commentary or financial resources, please visit www.aamlive.com.

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